Wall Street rallies on more inflation cheer

More signs the US economy is positioned for a soft landing today helped to sustain Wall Street markets after their outperformance so far this year.

The annual rate of inflation, which stood at 9.1% in June 2022, edged up for the first time in a year to 3.2% but the rise from 3% was due to base effects and below the 3.3% forecast.

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Further evidence that price pressures are easing emerged as core inflation excluding energy and food dipped to 4.7% compared with estimates for an unchanged figure of 4.8%.

Markets responded positively to the July reading, just as they did the previous month when the consumer prices index dropped from 4% and core prices beat expectations for the first time in eight months.

The Dow Jones Industrial Average added more than 350 points and the S&P 500 index recouped yesterday’s fall of 0.7% to leave the benchmark more than 16% higher this year. The hope among traders is that inflation has been tamed and that the recent resilience of the US economy won’t be derailed by more rate rises.

This Goldilocks scenario has been backed up by the gradual softening of the labour market, with today’s weekly initial jobless claims up by 21,000 to 248,000.

Federal Reserve policymakers, who only launched their five percentage points of tightening when headline and core inflation were at 8.5% and 6.5% respectively, have another set of inflation and jobs market figures before their next decision in September.

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Hopes are high they will hit the pause button although traders will be keeping an eye on robust wage growth and the recent surge in commodity prices after the tighter supply outlook lifted Brent crude to a six-month high at $88 a barrel.

Deutsche Bank strategist Jim Reid said: “We’ll all be watching oil, gas and food prices over the next few weeks and months. As it stands they should help to push up headline inflation shortly before the September Federal Reserve meeting, which will be a bit uncomfortable even if core inflation will be the main focus.”

The next decision will also have to consider the lag effects of monetary policy and whether the risks of doing too little outweigh the impact of doing too much.

With the second-quarter results season drawing to a close, traders are hopeful that the trough for US earnings has been reached at around 5% lower year-on-year. According to FactSet. 79% of those S&P 500 companies that have reported up to last Friday delivered a positive earnings per share surprise.

The latest beat came today from e-commerce giant Alibaba (NYSE:BABA) after it disclosed its best revenues growth since the third quarter of 2021. Its US-listed shares were 7% stronger after the better-than-expected update.